(Bloomberg) — In September, dozens of financial advisors from around the US converged on an upscale Greek restaurant in Midtown Manhattan for cocktails and dinner. The venue, Avra Madison Estiatorio, gets rave reviews for its first-class service and grilled branzino, but the main attraction that evening was tennis legend John McEnroe. The following day, after presentations on alternatives to stocks and bonds, the crowd proceeded to Arthur Ashe Stadium in Queens to watch a US Open quarterfinal, where then-world No. 1 Carlos Alcaraz defeated Germany’s Alexander Zverev.
The event was put on by alternative investment giant Ares Management Corp., one of a growing group of private equity firms courting the people who control the purse strings of everyday millionaires—doctors, attorneys and other affluent-but-not-quite-1% folks whose combined wealth stands at about $100 trillion globally, according to consulting firm Bain & Co.
Private equity companies have long sought to attract clients with as little as $5 million in investable assets. For the biggest names in the field—the likes of Apollo Global Management Inc., Ares, Blackstone Inc. and KKR & Co.—the next prize is those with $1 million to $5 million, a segment of US households that jumped almost 60%, to 12.7 million, in the 15 years to 2022, according to researcher CEG Insights. The race for these so-called mini-millionaires has intensified in the past year as institutional investors such as pension funds and endowments, often over-allocated to private equity, have loosened their embrace of the firms amid rising rates and economic uncertainty.
Companies across the industry are offering conferences, parties and steak dinners to boost their profile among individual investors. And some have created learning platforms with names like “Apollo Academy” and “Blackstone University”—which grant credits toward professional designations such as certified financial planner—aimed at schooling financial advisors on the business while, of course, highlighting the benefits of such investments. “Not a week goes by that we don’t hear a pitch from a major player,” says Jeffery Nauta of Henrickson Nauta Wealth Advisors in Michigan.
Individuals with assets between $1 million and $5 million dedicate only about 1% of their net worth to private equity and similar investments, Bain says, and increasing that share even modestly could translate to tens of billions of dollars for cash-hungry firms. But such investors can be more skittish than the financial giants, typically wanting the ability to cash out in the event of doctor bills, divorces or disasters, and they have a reputation in the industry for reneging on their commitments. One attorney, who asked not to be identified discussing confidential information, says he’s seen as many defaults from individuals on pledges to funds in the last two years as he saw in 15 years working with institutional investors.
These clients typically know little about alternative investments, and advisors say they have to remind them that private equity can lock up their money for years. The industry has created a somewhat more flexible category called semiliquid funds, which permit investors to cash out part of their holdings each quarter or month. But these generally allow firms to throttle redemptions if they’re flooded by withdrawal requests. “There’s no magical liquidity for less-liquid assets,” says David Levi, head of the wealth business at investment firm Brookfield Asset Management.
The industry’s pitch is that by forgoing liquidity, investors stand to get better returns over the long haul, with Blackstone saying that its flagship real estate fund for individuals has delivered about four times the returns of public REITs since its launch. But Jeffrey Hooke, a senior lecturer at Johns Hopkins Carey Business School, says private equity frequently underperforms public markets and that most individuals would fare better in an S&P 500 index fund. “The returns that are generated are often opaque,” Hooke says. “It’s hard to figure out whether the individual fund beats the market.”
A shift toward individual investors will expose the industry to greater scrutiny, and there’s a host of regulations around how managers can build offerings for such mini-millionaires. Rules limit everything from how many investors can be in a fund to whether a manager can take carried interest—effectively a cut of the profits from an investment. And they must closely watch the language they use in promotions and restrict marketing of their funds to specific categories of investors, with different guidelines for various levels of holdings.
Blackstone, the world’s leading alternative asset manager, arrived early to the race, starting a group to market funds to wealthy individuals in 2011, and it’s become by far the biggest player. It has about 300 people in its private wealth business, and individuals account for a quarter of the $1 trillion it manages. In 2017 the firm launched the Blackstone Real Estate Income Trust, known as BREIT, a property fund that has grown to $66 billion, more than five times the size of its nearest rival.
But while Blackstone is still the leader in attracting money to publicly registered, unlisted REITs and funds that offer credit to companies, it’s facing an increasingly crowded field. With Apollo, Ares and more than a dozen others expanding their offerings, Blackstone’s share of money going into such funds has fallen to 47% from 55% last year, investment bank Robert A. Stanger & Co. reports.
Blackstone’s experience highlights the perils of courting individuals. When investors became jittery about property markets last year, they ramped up requests to pull money from the fund, spurring curbs on redemptions for the past 12 months. Blackstone says the backlog is easing. Investors in October sought to pull $2.2 billion from the fund, down 58% from a peak in January, and clients who asked for cash back late last year have received virtually all of their money. Kevin Gannon, chief executive officer of Robert A. Stanger, says the pressures faced by BREIT and a pair of rivals were “the best thing that could happen to the industry,” with funds imposing redemption limits, but ultimately returning money to all their investors who asked for it.
As the race for individuals heats up, competitors have been working to chip away at Blackstone’s advantage. Last spring, Apollo attended a dinner for financial advisors at the Manhattan steakhouse Smith & Wollensky to discuss how private credit can replace bonds for investors. A few months later, the firm launched Apollo Aligned Alternatives, designed as a substitute for S&P 500 index funds.
Ares, which ranks among the top five firms in many of its offerings, is on an expansion drive as it seeks to win a bigger share of the budding market. In 2021 it acquired real estate investment firm Black Creek Group, and it has been increasing its offerings in real estate, credit and private equity. And like its rivals, the firm says that it uses the same investment team for its newer, consumer-focused funds and its institutional funds, giving small investors the same level of expertise as its traditional clients. “The winners are going to be the firms that can offer solutions across asset classes,” says Raj Dhanda, Ares’ global head of wealth management. “So they can be the most efficient and have the most investment integrity.”
